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Tuesday, October 11, 2016

Structural impediments to increasing the flock size

By Andrew Woods  |  Source: ABS, ICS

Key points

  • Since the late 1980s crop areas have increased as the flock size has decreased.
  • In the major sheep states the negative correlation between crop area and flock size has been a strong one, although this has broken down in recent years.
  • Using Victoria as an example there seems scope for an increase of 15-20% sheep numbers without impacting on crop area.
  • Using Victoria as an example it will take a decrease in crop area for the flock size to increase by more than 15-20%, which is a harder task.

2016-10-11 Wool Fig 1

2016-10-11 Wool Fig 2

With wool and sheep meat prices trading at high levels by historical standards, and seasonal conditions improving after a run of dry years, what is the upside in sheep numbers? A report recently released by the ANZ suggests the flock size needs to increase by 22 million (about 30%) by 2040 in order to maintain market share. This article takes a look at some structural impediments increases in the flock size.

In November 2014 (The Battle of the Spare Paddock) Mecardo looked at the relationship between crop area and flock size from the late 1980s onwards. From the collapse of the Reserve Price Scheme in 1991 the flock size trended lower for the following two decades while crop area expanded. In late 2014 Mecardo concluded that the flock size was stabilising, with a breakdown in the correlation between crop area and flock size in recent years. 2015 proved to be a dry year which continued the downward pressure on sheep numbers.

Now that seasonal conditions have turned for the better, with continued high prices for wool and sheep meats, it is time to look at the possible upside in sheep numbers. Is the 30% increase suggested by the ANZ as the required increase in order to maintain market share by 2040 feasible? Figure 1 is similar to those shown in late 2014, this time for Victoria. It compares the Victorian flock size with the area devoted to extensive cropping from 1987 through to 2015. Across that 28 year period the change in crop area accounts for 84% of the change in flock size.

Table 1 shows the state by state correlation between crop area and flock size. The relationship remains strong for South and Western Australia, has weakened for NSW and does not exist for Queensland and Tasmania. This variation in the relationship between flock size and crop area tells us that we need to investigate the drivers of flock size on a state basis rather than a national basis.

As noted in late 2014, the correlation in recent years between has disappeared with the flock holding around 15 million and crop area around 3.5 million hectares. Figure 2 shows the Victorian data from 2008 onwards, where there is no relationship between flock size and crop area. Using data from 2008 onwards it would be fairly easy for the flock size to increase by 2-3 million head which is an increase of 15-20%, as this would not seem to impact on crop area.

Taking the flock size back up to around 20 million, where it was a decade ago looks to be a bigger task. Figure 1 suggests that the crop area would need to shrink in order to allow such an increase. That is where the structural impediment to further increases in the flock size, beyond 15-20%, cuts in. Beyond an initial increase in sheep numbers, the sheep and wool industry will then have to wrestle farm resources off the cropping industries. This is unlikely to be an easy task.

What does this mean?

There looks to be scope for sheep numbers to increase, using Victoria as a guide, by 10-15% without impacting on crop area. Any increases beyond that would require the area cropped to shrink which does not seem that likely without an extended (for five or more years) out performance by wool and sheep meat prices in relation to crop (mainly wheat) prices.

Mecardo information is provided to assist in your marketing decisions. It contains a range of data and views on the current market. It is not intended to constitute advice for a specific purpose. Before taking any action in relation to information contained within this report, you should seek advice from a qualified professional. The information is obtained from a variety of sources and neither Mecardo nor Ag Concepts Advisory will be held liable for any loss or damage whatsoever that may arise from the use of information or for any error or mis-statement contained in this report. 


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